How we make $330 = $420 24 Times a Year

After a job change around 6 months ago, Mrs. AE FINALLY got access to her new companies 401K! Some people look forward to Christmas or vacations, I was looking forward to that magic date where we could start contributing more cash to a pre-tax bucket. It was seriously stressing me out and I’m sure that Mrs. AE and her HR rep were sick of my questions.

Obviously, the first paycheck we were eligible to contribute we transferred the same percentage over from her previous employer and BAM! Back to deferred taxes and tax-free growth bliss.

But.

When her next paycheck hit our account I was confused……I knew what her check was for the last 6 months, I knew what 14% of that check would be. To my surprise, a completely different number posted to our account. What the Hell happened? Surely I didn’t screw up subtracting one number from another.

I underestimated the beauty of 401K Math

Thankfully it was in a good way. We contributed $420, but her paycheck only dropped $330!

I literally asked if she got a raise and didn’t tell me because I underestimated the short-term tax benefits. The really sad part as I have written extensively about the benefits of 401Ks and it still blew me away.

Why didn’t I connect the dots? The only thing I can think of is how gradual we increased our 401k contributions to get them to the levels they are at. I didn’t notice the small tax implications on a 1% increase every quarter spread over few years.

You can’t beat this math!

For every $100 we saved, it only cost us $79 in our take-home pay. It’s like a 21% off sale but for contributing cash to yourself!

Over the course of the year, we will contribute $10,080 to her 401k and it will only “Cost” us $7,920 due to the tax savings this year. I say “Cost” because all the money is still ours, we just can’t get to it for about 30 more years.

That is a net savings of $2160/year*

Seeing the immediate benefits makes it hard for me to consider slowing down our retirement contributions and starting to focus on funding the EARLY part of our retirement (but it still may be necessary).

*Numbers may fluctuate slightly come tax time, but this money comes off the part of our income that is taxed at the highest percentage and Minnesota has above average income tax

For the doubters that think they can’t do this

I realize that we may be in a unique position to be able to withstand an $8,000 hit to our take-home pay throughout the year.

BUT. BUT. BUT.

We did not wake up one day and randomly decide to throw a huge chunk of money at her 401K. We were already contributing close to this amount at Mrs. AE’s previous job. It just all happened to hit at one time with the new 401K plan.

Getting to this level was a VERY iterative process that took us many years to accomplish. Literally increasing our 401K contributions by 1% a quarter and a few bigger bonus bumps when we got raises (seriously folks, increase that income! It opens so many doors).

You can see the proof of our slowly increasing contributions in this 401K post I did last year. The idea that we would be contributing over $29,000/year to our 401ks 5 years ago did not even seem possible (As of this year my 401K is maxed out – Boom!).

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Great work Mr and Mrs. AE! Saving 5 figures in retirement is hard for a lot of people because the moment I say “leave it there for 30 years” I can see their brain leaving the conversation. They do make good money, they don’t save any though.

Recently I learned that there’s confusion in some circles about what “maxing your 401k” means – apparently the was a misconception that maxing your 401k was putting in enough to get the full match. After that they were pretty much useless. I also see a lot of Roth IRA recommendations thrown out without any thought towards taxable income. So thank you for spreading the word on the power tax advantaged savings! I often think of the guinea pig experiment Mad Fientist did (basically comparing tax advantaged to post tax saving over time) and it’s amazing the difference. Yes, we do need to be mindful of 401k fees, but just because that topic blew up doesn’t mean we shouldn’t still do the math. You can still have higher fees and come out ahead.

Personally, I just moved to a new job that doesn’t have a 401k, so I’m all in on an IRA and an HSA. Both good options, but like they say sometimes you don’t realize what you got til it’s gone 🙂

Love this post AE! We are currently maxing my wife’s 403B (non profit equivalent to a 401k). I still remember the day she submitted the form to their CFO and he was crazy impressed. He said “If y’all are doing this when you’re 24, then you’ll be in great shape. You’re doing more than most people around here.” Full max out + the 4% match. Hard to beat.

I’m not eligible for mine until this July, but looking forward to maxing it out next year!

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